Exogenous dietary fat can induce obesity and promote diabetes, but endogenous fat production is not thought to affect skeletal muscle insulin resistance, an antecedent of metabolic disease. Unexpectedly, the lipogenic enzyme fatty acid synthase (FAS) was increased in the skeletal muscle of mice with diet-induced obesity and insulin resistance. Skeletal muscle-specific inactivation of FAS protected mice from insulin resistance without altering adiposity, specific inflammatory mediators of insulin signaling, or skeletal muscle levels of diacylglycerol or ceramide. Increased insulin sensitivity despite high-fat feeding was driven by activation of AMPK without affecting AMP content or the AMP/ATP ratio in resting skeletal muscle. AMPK was induced by elevated cytosolic calcium caused by impaired sarco/endoplasmic reticulum calcium ATPase (SERCA) activity due to altered phospholipid composition of the sarcoplasmic reticulum (SR), but came at the expense of decreased muscle strength. Thus, inhibition of skeletal muscle FAS prevents obesity-associated diabetes in mice, but also causes muscle weakness, which suggests that mammals have retained the capacity for lipogenesis in muscle to preserve physical performance in the setting of disrupted metabolic homeostasis.